Two Long Term Concerns Stand Taller then Brexit

Two articles in this weekend’s US print editions of the Wall Street Journal and Financial Times highlight the real concerns that threaten global growth, far more so than the ministrations of (hopefully) rational politicians soon to embroil in Brexit negotiations. One concerns China and the other Italy.
In “Rising Worries Cloud China GDP“, Alex Frangis of the WSJ reports that GDP continues to show signs of weakness and more importantly, how the declining GDP is accounted for, is more troubling than its decline. It seems private investment continues to decline and public debt continues to raise.
The declining private sector investment is bad since it already represents the lions share of investment. So as that declines, overall GDP declines and the smaller sector of public debt has to step up. But this is exactly the opposite trend China needs to help transition its economy from product based to consumer based.
Housing prices show signs of cooling though by western standards the numbers are impressive. At the same time anecdotal data on unemployment shows troubling shifts too. Overall the article suggests all the wrong data points we need to suggest positive changes. If anything, China is headed towards more problems and with that, so do we.
The second article, “Exploiting the fine print to save Italy’s Banks“, Dan MccRum a and Thomas Hale of the FT, report the troubling challenges facing EU regulators that still have not closed all the leaks that sprang up post the Greek crisis. Forget the fact that Greece’s economy remains a basket case, Italy’s banks are in trouble. Italy never addressed the bed debt problem overhanging their economy; they neither farmed out all major losses to debt holders, nor give off the bad debts to a ‘bad bank’. The chickens are coming home to roost.  
The resolution will be yet another fiddle by the EU. The Italian banks will need a bail out using public funds. Italy is always over budget and should face an EU penalty for financial promiscuity. It will be waived, as it has been waived for France and Germany before. Why do we even accept such rules if they just don’t count?  
If we ignore the politics of rule setting and bypassing then, and just focus on Italy’s financing, we can determine that the fundamental issues facing Greece are not dissimilar to Italy. What differs is how such nations seek to address those challenges. Italy needs to modernize and revamp its banking and investment sector. It needs to address losses that have piled up. Until, and if, it does, the Euro will remain a troubled currency. This is what sits at the heart of a rotten Europe.


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